Buffer formation in a demanding quarter. HDFC’s retail sector growth accelerated because of the lockout. To further boost its ECL buffers, the firm used substantial capital gains from stake-sales in the insurance industry. The sharp fall in borrowing costs is an optimistic one in the middle of a tough quarter. Even as the near-term NII is expected to remain subdued and slippage overhang remains strong, the large provisioning buffers from HDFC put it in a much more stable place to navigate through these difficult times compared to peers.
HDFC used entire Rs 12 billion capital gains from 1.7 percent stake-selling in HDFC Life to raise ECL. The firm has already raised ECL coverage from 1.6 percent in 1QFY20 to 2.4 percent in 4QFY20 to 2.6 percent of the loan portfolio, better than other rivals, even as its corporate and development finance portfolio has decreased from 400 bps y-o-y to 17 percent of overall loans. Even though Covid-19 is contributing to the real estate sector’s current woes, HDFC ‘s large buffers give protection.
HDFC announced a reduction of approximately 500 bps q-o-q in moratorium loans to 22.4 percent; the decrease was primarily in the single sector (16.6 percent of loans) from 22.6 percent q-o-q. Although the trend is optimistic directionally, with anticipated variability in monthly collections, we do not read much about that. We would see some danger of around 2.3% of the individual loan book; HDFC stressed that 5 % of people who opted for the moratorium (0.8% of the total individual loan book) faced employment cuts and 9% (1.5% of the total individual loan book) faced company closures.
Non-individual loan book moratorium fell slightly to 39 percent, down 150 bps q-o-q. With already substantial stress in the real estate market, combined with difficulties associated with COVID, HDFC has continued to make significant provisions for ECL.
We are cutting our core PBT forecast at 2-3 percent to represent slightly lower NIM due to delivering lower interest rates to home loan lenders even as loan growth edges up a little bit. We are building no capital losses for the next nine months and therefore marginal gains; strong dividend income growth for FY2021E is standardization on a small FY2020 basis.
Analysis on HDFC remains unchanged – after IL&FS, HDFC is a favored investor in the bond markets, rendering its liability side competitive, its strategy to refrain from aggressive real estate loans paid off with substantially superior books and strong balance sheet buffers, HDFC is likely to emerge as the only major NBFC in the real estate lending markets, thereby boosting NIM and core RoE to nearly 16-18%.
